LONDON, March 21 (Reuters) - Signs the euro zone's economic
downturn is deepening and worries over a possible financial
meltdown in Cyprus sent world shares, oil and the single
currency lower on Thursday.

The falls could have been greater but for earlier data
showing a pick-up in Chinese factory activity and the commitment
by U.S. Federal Reserve on Tuesday to stick with its ultra-loose
monetary policy stance.

But the euro and European shares moved decisively lower,
with the single currency briefly dipping below $1.29 to the
dollar, following weak readings of the March Purchasing
Manager's Indexes (PMIs), which showed activity across the
17-nation currency bloc slowing from already weak levels.

The data revealed that German growth was starting to suffer
from the euro zone's renewed problems and again highlighted a
widening chasm with France, the region's second largest economy.

"It (PMI data) does not look good," Antonio Garcia Pascual,
chief southern European economist at Barclays. "Maybe we were
expecting it in France but the weakness in Germany was a
surprise."

The FTSEurofirst 300 index of top European shares
extended its falls after the data to be down 0.5 percent to
1,192.21 points. The main market indexes in London,
Paris and Frankfurt were all around 1.0 percent
lower.

Yields on German 10-year government bonds, used as a
safe-haven in times of market stress, stayed close to their 2013
lows at 1.38 percent, barely changed on the day.

MSCI's world equity index dipped only about
0.1 percent, but remains on course for its worst week since
November last year when worries about the U.S. fiscal cliff were
driving markets lower.

CYPRUS DEADLINE

Apart from the bleak economic numbers, market attention was
firmly on Cyprus, where crisis talks among political leaders
resumed to seek a new bailout plan which could involve Russia.

The European Central Bank has set a Monday deadline for
Cyprus to agree a new plan, threatening to cut off funding to
the island's cash-strapped banks if a programme is not agreed by
then with the European Union and the IMF.

Cyprus has faced the prospect of bankruptcy since Tuesday
when its tiny parliament voted unanimously against a levy on
bank deposits to raise 5.8 billion euros ($7.5 billion) demanded
by the EU under a 10 billion euro rescue deal.

The worries about Cyprus look to be contained for the moment
with Spain able to sell 4.5 billion euros of new bonds on
|Thursday in an auction that saw strong demand and resulted in
lower yields than at recent debt sales.

"All in all, no signs of Cyprus contagion in this sale,"
said Marc Ostwald, a strategist at London-based Monument
Securities.

Spain's 10-year bond yield in the secondary market fell 10
basis points on the day to 4.9 percent.

FED HELP

Most markets had begun the day firmly underpinned by the
Federal Reserve's latest policy statement at which the current
aggressive policy stimulus programme was left unchanged despite
recent improvements in the U.S. economy.

Fed Chairman Ben Bernanke said the central bank might slow
the pace of its bond buying but only after the labour market
showed sustained improvement over a number of months.

Asian shares gained a further lift when the HSBC Purchasing
Managers' Index for China showed a rise to 51.7 in March from
50.4 in February, pointing towards solid but not spectacular
first-quarter growth in the world's second-largest economy.

Japan's Nikkei stock average climbed 1.3 percent,
hitting a 4-1/2-year high as exporters gained on the Fed's
commitment but also expectations of further monetary easing by
the Bank of Japan.

The BoJ's new governor, Haruhiko Kuroda, in his first news
conference, reaffirmed the commitment to expand Japan monetary
stimulus to beat deflation, sending 10-year government bond
yields to a near-decade low on Thursday.

Oil markets drew support from the Chinese data to hold on to
much of their previous day's gains but have eased slightly due
the concerns about Cyprus and the wider euro zone.

The pledge by the Fed a pledge to keep spending $85 billion
a month buying bonds lent support to gold. Spot gold firmed 0.2
percent to $1,608.56 an ounce, though off a three-week
high of $1,615.16 hit earlier this week.